Unit 3.6·Macroeconomics

Expansionary and Contractionary Fiscal Policy

Demand Management (Fiscal Policy)

AO3·AO4·Diagram required

Syllabus requirement

Use of fiscal policy to close deflationary/recessionary and inflationary gaps in both Keynesian and monetarist models.

Assessment objectives
AO3 Synthesis and EvaluationAO4 Use of Appropriate Skills
Required diagram: AD/AS diagram (Keynesian): shows fiscal expansion shifting AD right to close deflationary gap using curved supply curve.AD/AS diagram (Monetarist): shows AD shifting right/left to close output gaps under flexible price levels.

Summary

This topic explains expansionary and contractionary fiscal policy as tools governments use to influence aggregate demand and overall economic activity. It describes how fiscal policy can promote long-term growth and low unemployment through government spending on physical capital, human capital formation, and investment incentives, and it outlines sources of government revenue and types of government expenditure including current, capital and transfer payments.

Real-world examples for this unit

U.S. dollar relief payments and government support during the COVID-19 economic downturn

U.S. COVID-19 Fiscal Relief Response

Expansionary Fiscal Policy2020 to 2021
Japanese government spending flowing to households, infrastructure and businesses to stimulate the economy.

Japan's 2025 Economic Package: Expansionary Fiscal Policy

Expansionary Fiscal Policy2025–2026
Romanian government budget with higher taxes and restrained public spending reducing aggregate demand.

Romania's 2025–26 Fiscal Consolidation: Contractionary Fiscal Policy

Contractionary Fiscal Policy2025–2026
German public investment in railways, digital networks, energy infrastructure and schools financed through a long-term infrastructure fund.

Germany's €500bn Infrastructure Fund: Fiscal Policy and Long-Run Growth

Expansionary Fiscal Policy2025–2036